Court strikes down 21 cent debit card fees

Swipe fees on debit card purchases is expected to be lowered, thanks to a U.S. District Court ruling on Wednesday.

A federal court on Wednesday struck down a Federal Reserve rule that placed a 21-cent cap on fees that banks charge retail stores for each debit card transaction.

The ruling is a win for retail stores who had filed the lawsuit charging that the U.S. Federal Reserve's cap was too high on swipe fees they pay to banks each time a customer uses a debit card. It's potentially a big loss for banks who will now have to charge lower fees.

The U.S. District Court in Washington called the Fed's cap "arbitrary and capricious." Judge Richard Leon also suggested in the ruling that the Fed should reconsider earlier staff proposals to lower the fee to 12 cents.

The fight over swipe fees stems from new laws enacted after the U.S. financial crisis. They required the Federal Reserve to ensure that fees to process debit card purchases were reasonable. At that time, the average fee per transaction was about 40 cents.

After fees fell in 2011, one survey found that 67% of retailers kept prices the same or raised them instead of passing on savings to customers, according to the Electronics Payments Coalition, a group of banks and credit unions.

The decision is bad news for the banks. After the swipe fees were lowered in 2011, it led to drops in revenue at many banks like Bank of America(BAC) , J.P. Morgan Chase(JPM) and Wells Fargo(WFC). The banks tried to charge new debit card fees, but public outrage caused them to reverse course.

"This court decision could result in debit interchange fees being cut by more than 50%. . .as a result we see it as negative for the card-issuing banks as well as for the networks," said Jaret Seiberg, an analyst with Guggenheim's WRG Financial Services.

Groups representing banks called the decision "disappointing." It would lead to "further lining the pockets of our nation's big-box retailers at their own customers' expense," said Frank Keating, president of the American Bankers Association.

The ruling also impacts charge card processors Visa(V) and Mastercard(MA), which collect swipe fees for the banks. Visa and Mastercard charge retailers separate fees for using their payment networks. The ruling could pressure firms to lower fees. Shares of Visa fell 11% in trading in Wednesday. MasterCard was up 9% after reporting stronger than expected results.

U.S. District Judge Richard Leon said he wanted to give the Fed a few months to figure out a plan for the fees, which have been in existence since October 2011.

Until the Fed responds, nothing will change for now.

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Retail groups cheered the ruling.

"It's a good ruling for our merchants and a good ruling for our customers," said National Retail Federation General Counsel Mallory Duncan, who disputes suggestions that savings won't be passed on to customers. "Consumers have seen savings and once the Fed gets this right, they'll see more savings."

Unless the Federal Reserve decides to appeal, the regulator will now have to go back to the drawing board and get tougher on debit card fees. Judge Leon had harsh criticism for the regulator saying it "completely misunderstood" the law.

A request for comment from the Fed wasn't immediately returned.

Sen. Richard Durbin, the Illinois Democrat who authored the measure to lower fees called the ruling a "victory for consumers and small business around the country."